Choosing A Broker: STP Or ECN?
Each trader has different needs, and picking the right broker that will align these needs is very important. With several different types of brokers, the following two are the most common ones: STP and ECN brokers. Both options have positive and negative points, which makes it difficult for traders to choose the one that is best for them.
Traders using foreign exchange brokers may choose between dealing desk (DD) and non-dealing desk (NDD) execution. How market orders are processed is determined by these models.
Dealing desk brokers, often known as “market makers,” are responsible for fulfilling client orders at a single location. When deciding whether or not to fulfil an order, they take into account a variety of factors, including the rate of market change and data gleaned from news outlets. Customers may make a transaction in the other direction if their positions do not coincide with those of another consumer.
DD brokers make money by trading using the difference between buying and selling prices (the so-called spread) and taking the opposite side of a trade.
Non-dealing desk (NDD) brokers are types of brokers who send orders directly to the interbank market via ECN or STP technology. They make it faster and easier to process orders by letting you directly connect to banks. NDD brokers either give the exact spreads from their liquidity providers or charge a fee to provide access to these providers.
NDD brokers profit from their client’s losses, while DD brokers make money from the difference between buying and selling prices.
The Straight-Through Processing (STP) methodology was developed in the 1990s to automate the processing of financial transactions in the stock trading markets. STP allows traders to acquire better pricing and execute deals immediately by submitting orders directly to banks. Faster processing, fewer issues with settling payments, and lower operating costs are all benefits of this technology.
To locate and link buyers and sellers of financial goods, ECN brokers use a specialised system known as Electronic Communication Networks (ECNs). By connecting brokers, traders, and liquidity providers to major trading platforms like Instinet, NYSE Arca, and SelectNet, they facilitate transactions between these parties directly. This ensures that the identity of those involved in a deal remains always concealed.
ECN solutions provide greater flexibility, lower costs, quicker execution, simpler trading, and more transparency for investors. ECN brokers help financial organisations save money while allowing consumers who can’t trade during typical hours access to the market.
Different brokerage models, such as ECN and STP, have discrepancies in how they handle the process of placing orders, their organisational setup, and the speed at which transactions are carried out.
Thus, ECN brokers send orders straight to the main interbank market, while STP brokers send orders to other brokers or market brokers.
Moreover, ECN brokers earn a small fee for making trades happen, while STP brokers make money from commission fees and the difference between buying and selling prices.
Also, ECN brokers ensure trades are executed quickly because they are directly connected to sources of trading liquidity. In contrast, STP brokers might experience small delays when sending orders through intermediaries.
To choose the right broker, consider the technology they use. STP brokers allow you to access liquidity from other sources without involving a broker, while ECN brokers offer faster and cheaper execution by connecting you directly to their networks, with better liquidity.
